Appier Group (TSE:4180) Seems To Use Debt Quite Sensibly

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Appier Group, Inc. (TSE:4180) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Appier Group

What Is Appier Group's Debt?

The image below, which you can click on for greater detail, shows that Appier Group had debt of JP¥600.0m at the end of December 2023, a reduction from JP¥2.15b over a year. But on the other hand it also has JP¥19.1b in cash, leading to a JP¥18.5b net cash position.

How Healthy Is Appier Group's Balance Sheet?

According to the last reported balance sheet, Appier Group had liabilities of JP¥6.55b due within 12 months, and liabilities of JP¥2.22b due beyond 12 months. Offsetting these obligations, it had cash of JP¥19.1b as well as receivables valued at JP¥3.73b due within 12 months. So it actually has JP¥14.0b more liquid assets than total liabilities.

This short term liquidity is a sign that Appier Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Appier Group has more cash than debt is arguably a good indication that it can manage its debt safely.

Although Appier Group made a loss at the EBIT level, last year, it was also good to see that it generated JP¥546m in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Appier Group can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Appier Group has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last year, Appier Group burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Appier Group has net cash of JP¥18.5b, as well as more liquid assets than liabilities. So we don't have any problem with Appier Group's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Appier Group (1 makes us a bit uncomfortable) you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.